U.S. patent application number 10/461835 was filed with the patent office on 2004-07-29 for guaranteed physical delivery futures contract and method and system of consolidating same.
Invention is credited to Kinnear, Kirk P..
Application Number | 20040148249 10/461835 |
Document ID | / |
Family ID | 32738405 |
Filed Date | 2004-07-29 |
United States Patent
Application |
20040148249 |
Kind Code |
A1 |
Kinnear, Kirk P. |
July 29, 2004 |
Guaranteed physical delivery futures contract and method and system
of consolidating same
Abstract
A guaranteed physical delivery futures contract and method and
system for consolidating same are disclosed. The method includes
guaranteeing physical delivery for future positions of market
participants having open first-nearby time positions of a
particular size, making additions to or subtractions from open
first-nearby time positions of market participants that are less
than the particular size and offsetting the additions to and
subtractions from market participants' open first-nearby time
positions with opposite positions in a second-nearby time. The
system includes one or more servers and communications links, the
communications links for receiving position data, including open
positions, and the servers are configured to make additions to or
subtractions from open first-nearby time positions less than a
certain size and adjust market participant second-nearby time
positions based on the additions to or subtractions from open
first-nearby time positions. In certain embodiments, the underlying
commodity is crude oil and the particular size is the size of a
cargo shipment, about 600,000 barrels.
Inventors: |
Kinnear, Kirk P.;
(Greenwich, CT) |
Correspondence
Address: |
Ian G. DiBernardo
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York
NY
10038
US
|
Family ID: |
32738405 |
Appl. No.: |
10/461835 |
Filed: |
June 13, 2003 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
|
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60442605 |
Jan 24, 2003 |
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Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 99/00 20130101;
G06Q 40/00 20130101; G06Q 40/04 20130101 |
Class at
Publication: |
705/037 |
International
Class: |
G06F 017/60 |
Claims
What is claimed is:
1. A method comprising: guaranteeing physical delivery for future
positions of market participants having open first-nearby time
positions of a particular size; and making additions to or
subtractions from open first-nearby time positions of market
participants that are less than the particular size.
2. The method of claim 1 further comprising: offsetting additions
to and subtractions from market participants' open first-nearby
time positions with opposite positions in a second-nearby time.
3. The method of claim 2 wherein the offsetting comprises
determining a final settlement price and a spread index, and
offsetting the additions to and subtractions from the first-nearby
time positions at a price equal to the difference between the final
settlement price and spread index.
4. The method of claim 3 wherein the final settlement price is a
weighted average of all first-nearby time trades executed during a
first predetermined period prior to market closing on contract
expiration day.
5. The method of claim 4 wherein the index spread is a
weighted-average of all bona fide first-nearby/second-nearby spread
transactions executed during a second predetermined period of
trading on contract expiration day, wherein a bona fide
first-nearby/second-nearby spread transaction is a purchase in one
of the first-nearby time or second-nearby time executed
simultaneously with a sale of equal volume in another of the
first-nearby time or second-nearby time.
6. The method of claim 1 further comprising establishing a matching
day and time on which the additions and subtractions are made.
7. The method of claim 1 further comprising matching futures longs
having the particular size with futures shorts.
8. The method of claim 7 wherein future longs having the particular
size are first matched with future shorts having the particular
size.
9. The method of claim 7 wherein: matching comprises matching a
first participant's future long position in the first-nearby time
equal to the particular size with a second participant's future
short position in the first-nearby time an amount equal to less
than the particular size, and wherein making additions to and
subtraction from comprises subtracting from the second
participant's first-nearby time position a difference between the
particular size and the amount, and wherein offsetting comprises
adding to the second participant's second-nearby time position the
difference.
10. The method of claim 9 wherein: adding to the second
participant's second-nearby time position is at the difference
between a final settlement price and a spread index.
11. The method of claim 1 wherein the method is for creating a
market in futures contracts for North Sea Light crude, and wherein
the particular size is 600,000 barrels.
12. A method of guaranteeing physical delivery for market
participants having cargo-size positions, the method comprising:
identifying open first-nearby time positions, the open first-nearby
time positions including: a first number of open cargo-size long
positions; a second number of open cargo-size short positions; less
than cargo-size long positions; and less than cargo-size short
positions; matching any open cargo-size long positions with any
open cargo-size short positions; if the first number equals the
second number, then bringing remaining open first-nearby time
positions to zero; if the first number is less than the second
number, then matching unmatched cargo-size short positions with
less than cargo-size long positions of long participants,
increasing the less than cargo-size long positions to cargo-size
long positions and adjusting a second-nearby time position of the
long participants; and if the first number is greater than the
second number, then matching unmatched cargo-size long positions
with less than cargo-size short positions of short participants,
increasing the less than cargo-size short positions to cargo-size
short positions and adjusting a second-nearby time position of the
short participants, thereby guaranteeing physical delivery to
participants having cargo-size first-nearby time positions.
13. A computer system for automatically consolidating futures
contract position of to guarantee physical delivery of a commodity,
the system comprising: one or more communications links receiving
market participant position information, the position information
including identification of open first-nearby time long positions
and open first-nearby time short positions; one or more processors
configured to: match open first-nearby time long positions
first-nearby time short positions received from the communication
links; make additions to or subtractions from open first-nearby
time positions less than a certain size; and adjust market
participant second-nearby time positions based on the additions to
or subtractions from open first-nearby time positions.
14. The system of claim 13 further comprising an electronic
database in communication with the processors, the database storing
market participant position information, wherein adjusting market
participant second-nearby time positions includes updating the
database.
15. A method of receiving guaranteed physical delivery of a
cargo-size position in a futures contract, the method comprising:
establishing an open first-nearby time future position; being
matched to an opposite open first-nearby time future position of a
market participant; and entering into a physical market contract
based on the futures contract with the market participant, the
physical market contract resulting in physical delivery.
16. The method of claim 15 wherein the open first-nearby time
position is a cargo-size position.
17. The method of claim 15 wherein the open first-nearby time
position is less than cargo-size, the method further comprising
receiving an adjustment to the open first-nearby time position, the
adjustment and the open first-nearby time position equaling a
cargo-size position.
18. The method of claim 17 further comprising receiving an
adjustment to a second-nearby time position, the adjustment to the
second-nearby time position offsetting the adjustment to the
first-nearby time position.
Description
CROSS-REFERENCE TO RELATED APPLICATION
[0001] This application claims the benefit of U.S. Provisional
Application Serial No. 60/442,605, entitled Guaranteed Physical
Delivery Futures Contract and Method of Consolidating Same, filed
Jan. 24, 2003, which application is hereby incorporated by
reference herein.
BACKGROUND OF THE INVENTION
[0002] Several commodity exchanges, such as the International
Petroleum Exchange, the New York Mercantile Exchange, the Tokyo
Commodity Exchange, and the Singapore Exchange have over the years
launched, or attempted to launch, futures contracts referencing one
or more of the world's commonly traded crude oil grades. These
grades are referred to by the petroleum industry and financial
community as crude oil benchmarks or markers, and include Brent,
Dubai, Oman, Tapis, Urals and West Texas Intermediate (WTI). In
order for a crude type to be considered a true international
marker, the grade must be capable of being transported from the oil
field where it is produced, to refining centers around the world.
The most common method of transporting crude from export terminals
to oil refineries, is via large ocean-going vessels. (Presently,
however, WTI is precluded from being a true international marker
crude due to export restrictions imposed by the United States
government.)
[0003] Presently, all commodity exchanges with petroleum futures
contracts referencing one or more international crude markers are
cash settlement contracts. Under the terms of these contracts, all
open long or short futures positions at contract expiry are
financially settled against an index. Due largely to load-port
terminal and vessel shipping constraints, commodity exchanges that
have developed international marker crude oil contracts have chosen
to use financial settlement to meet obligations resulting from open
positions held through expiry of the contract. Under this previous
method, the futures exchange calculates an index price on the final
day of trading. All outstanding open futures positions held beyond
contract expiry, are financially liquidated, or cash-settled
against the index price. No physical delivery of the commodity
takes place.
[0004] In the past, some crude oil futures exchanges with cash
settlement contracts have purported their contracts are in fact
physical delivery. These claims relate solely to exchange for
physical (EFP) provisions within the contract, and are misleading
and are fallacious. An EFP simply involves physical delivery from
one participant to another with a concomitant assumption of equal,
but opposite futures position by participants. EFP trades are
strictly voluntarily. The EFP transaction is simply an optional
trading tool, that market participants can choose to use to shift
physical positions "on" or "off" a futures exchange, thus
optionally allowing participants to convert physical delivery into
futures positions and vice versa. The futures exchange does not
mandate these trades, nor does it match the market participants in
an EFP transaction. Additionally, the market participant in an EFP
transaction assumes the performance and financial risk of the
counterparty, with respect to the physical portion of the EFP. In
an EFP transaction market participants lose the financial
protection provided by the futures exchange. Consequently, futures
exchanges cannot assure market participants physical delivery under
their cash settlement contracts, and claims to the contrary are
incorrect. As such, a need exists, for a futures contract that
guarantees physical delivery.
[0005] The major unsolved problem futures exchanges have faced in
the past when trying to structure a physical delivery contract for
commodities that load in bulk, is developing a product that trades
in lots large enough to meet the minimum requirements of producers,
consumers, and hedgers, commonly referred to as "commercials," and
small enough to appeal to a wide range of investors, speculators,
and exchange floor locals, commonly referred to as
"non-commercials." A physical delivery contract ideally should
satisfy the needs of both commercials and non-commercials.
[0006] In addition to not providing physical delivery of the
commodity, cash-settlement futures contracts for commodities that
load on large ocean-going vessels present other difficulties for
market participants attempting to manage risk. These risks include
exposure to pricing distortions resulting from large highly
leveraged futures positions held by one or more market participant
and pricing basis risk (i.e., the risk associated with the
difference between the futures exchange closing price on expiry and
the final published index price).
[0007] Exposure to pricing distortions occurs, at least in part,
because exchanges with cash-settlement futures contracts have not
imposed position limits on individual market participants. All
futures positions held through expiry are liquidated by the
exchange, and financially settled at the index price. This contract
feature enables market participants to accumulate and retain large
futures positions, through expiry, as leverage for large physical
positions in the underlying commodity. This may distort prices and
prevent convergence of the futures and physical price of the
commodity upon contract expiry.
[0008] Basis risk occurs because, the final index price, against
which all open positions are financially settled, is typically not
released by the futures exchange until well after the close of
trading. Some exchanges do not publish the index price until the
following business day because details of the physical transactions
and market assessments used in the calculation of the index are
often delayed, as price reporting services gather, verify and
publish price information.
[0009] To avoid pricing basis risk against the index, market
participants with open futures positions on the final trading day
must ratably replicate all the physical trades during the index
period. This is infeasible as the index assessment period can be as
long as twenty-three (23) hours, and information on the concluded
physical trades that generate the index is not available to the
market participant in real-time.
[0010] Furthermore, minimum loading volume for delivery under a
single contract in the forward physical market for commodities that
load on large, ocean-going vessels is a significant multiple of the
size of a single futures contract in the same commodity. For
example, the difference is approximately 600,000 barrels for the
physical forward contract verses 1,000 barrels for the futures
contract. In liquid natural gas (LNG), the difference is
approximately 138,000 CBM verses 10,000 MMBtu for the futures
contract. The large size of a single physical contract makes it
difficult to liquidate positions ratably during the index period
and, therefore, to avoid basis risk.
[0011] Thus, a need exists for an improved futures contract and,
more specifically, a futures contract guaranteeing physical
delivery of the underlying commodity that reduces exposure to
pricing distortions and basis risk.
SUMMARY OF THE INVENTION
[0012] The present invention satisfies these and other needs. One
embodiment of the present invention relates to the method of
automatic conversion, of all open cargo-size futures positions into
physical delivery. The method includes guaranteeing physical
delivery for future positions of market participants having open
first-nearby time positions of a particular size, making additions
to or subtractions from open first-nearby time positions of market
participants that are less than the particular size and offsetting
the additions to and subtractions from market participants' open
first-nearby time positions with opposite positions in a
second-nearby time.
[0013] As will be appreciated, certain embodiments of the present
invention relate to the consolidation of futures positions held
through contract expiry, and the conversion of open futures
positions into physical positions, without exposure to outright
(non-spread) price risk, during the time period required for
position consolidation.
[0014] Other embodiments of the present invention allow market
participants' open positions to be aggregated. In such an
embodiment, market participants with open long or short positions
of less than cargo size are aggregated to achieve a combined
cargo-sized position. Apportionment of the commodity occurs later,
for example, at the delivery port, thereby allowing participants to
take physical delivery.
[0015] In still other embodiments, a system for providing
guaranteed physical delivery includes one or more servers and
communications links, the communications links for receiving
position data, including open positions, and the servers are
configured to make additions to or subtractions from open
first-nearby time positions less than a certain size and adjust
market participant second-nearby time positions based on the
additions to or subtractions from open first-nearby time
positions.
[0016] In certain embodiments, the underlying commodity is crude
oil and the particular size is the size of a cargo shipment, about
600,000 barrels.
BRIEF DESCRIPTION OF THE DRAWINGS
[0017] The following drawing figures, which form a part hereof,
provide illustrative embodiments of the present invention and are
not meant to be limiting of the scope thereof.
[0018] FIG. 1a is a schematic illustrating the system according to
one embodiment of the present invention.
[0019] FIG. 1b is a flow chart illustrating the overall process of
consolidating futures contracts according to one embodiment of the
present invention.
[0020] FIGS. 2a and 2b are a flow chart illustrating the process of
matching open positions according to one embodiment of the present
invention.
DETAILED DESCRIPTION OF CERTAIN EMBODIMENTS
[0021] Certain embodiments of the present invention will now be
described with reference to the foregoing figures. In general, such
embodiments relate to a process where upon expiry of a futures
contract, purchase and sale obligations for a commodity can be
satisfied by physical delivery of the commodity, instead of
financial settlement. More specifically, certain embodiments are
directed to futures contracts, that are consolidated using a
process that guarantees qualified futures market participants
physical delivery of the commodity.
[0022] As an initial matter, although the present invention is
particularly suited for use with commodities that are delivered in
relatively large, generally fixed quantities (for example, crude
oil, as it loads on large, ocean-going vessels, having, for
example, cargo capacity of 600,000 barrels or 600 lots) and certain
embodiments are described in terms of crude oil and "cargo-size"
shipments, it is to be understood that any commodity and shipment
size can be used. Thus, the term "cargo-size" is used broadly to
refer to the shipping amount, volume or quantity of whatever
physical commodity is the subject of the contract. Such other
commodities include, for example, liquid natural gas (LNG),
petroleum products, fuel oil, liquid propane gas (LPG), ethanol,
fertilizer and the like.
[0023] As will be appreciated based on the disclosure set forth
herein, the futures contract and consolidation process for
guaranteeing physical delivery according to the present embodiment
of the present invention provides convergence between the exchange
traded futures for a commodity and the underlying physical
commodity at contract expiry. Such convergence is a function of the
futures exchange delivery terms being directly linked to the
prevailing industry physical forward contract.
[0024] In the present embodiment, the futures contract is
administered and consolidated by a futures exchange and associated
futures clearinghouse using a process in which the following terms
have the definitions set forth below.
[0025] The "First-Nearby Month" shall mean the then-current month
in which trading is being transacted and for which physical
delivery will be determined. In contrast, the "Second-Nearby Month"
shall mean the month immediately following the First-Nearby Month.
It should be understood that although the present embodiment
utilized months, other divisions time may be used. Furthermore,
such periods, whether months or otherwise, may begin and end as set
by the futures exchange (e.g., not calendar months).
[0026] The "Final Settlement Price" shall mean the weighted-average
of all First-Nearby month trades of the contract executed on the
exchange floor, and/or on an approved electronic trading platform
as determined by the exchange, within one or more set periods for
example, during the final thirty (30) minutes of trading on a
specified day (such as the contract expiry day of the then current
month).
[0027] The "Spread Index" shall mean the weighted-average of all
"bona fide" First-Nearby/Second-Nearby spread transactions, where
such transactions include a purchase in one of the two months,
executed simultaneously with a sale of equal volume in the other
month at an agreed upon price differential) executed on the
exchange floor, and/or electronic platform, within a set time
period, for example, during the final thirty (30) minutes of
trading on expiration day.
[0028] Bona fide spreads are those supported by a trade ticket with
the First-Nearby Month price corresponding with the Futures
Exchange "fixed-price" released daily at a set time, for example,
fifteen (15) minutes after the market opening. The Futures Exchange
determines the fixed-price using a published methodology, such as,
for example, the high or low price in the opening daily range, an
average of trades in a certain period, a weighted average of trades
in a certain period, and the like. The Spread Index of the present
embodiment ensures "legged spreads" (spreads executed as two
separate outright transactions in the First-Nearby/Second-Nearby
contract months, at the current market price) are not included in
the Spread Index, thereby causing the spread index to accurately
reflect the market. In alternate embodiments, however, legged
spreads are considered.
[0029] "Matching Day" shall be defined as a specified day after the
expiry of the First-Nearby Month contract, for example, the first
trading day after expiry. As discussed in greater detail below,
market participants will be given until a set time on Matching Day
to consolidate their open First-Nearby Month futures, physical
partial cargo and physical cargo-size positions to either zero (0),
or to cargo-size. Position consolidation can be done through any
number of means, including the use of Exchange for Physical (EFP),
Exchange for Swap (EFS), Exchange for Option (EFO), Exchange for
Futures (EFF), and the like. In the present embodiment, this set
time, which is referred to as the "consolidation deadline," is
12:00 PM (noon) EST, although any other time may be used.
[0030] As described in greater detail below, any market participant
with open First-Nearby Month futures positions after the
consolidation deadline on Matching Day will be notified by the
Futures Clearinghouse at a set time, such as 3:00 PM EST on
Matching Day, whether their First-Nearby Month futures position has
been reduced to zero (0), or increased to cargo-size and matched
with another market participant for physical delivery.
[0031] Having provided definitions for terms used in the present
embodiment, the process of consolidating the contracts, including
the matching process used to provide market participants with
guaranteed physical delivery and to determine which participants
will have their first-nearby month position taken to zero or to
cargo-size will now be described in greater detail.
[0032] Although the present invention may be implemented manually,
in the present embodiment, the futures exchange and/or its
associated futures clearinghouse utilize a computer system to
implement the process. One exemplary computer system is shown in
FIG. 1a and includes one or more exchange computer servers 10, or
other processors, and an exchange database 12 coupled to an
exchange network 14. In general, the exchange servers 10, database
12 and network 14 are accessible by the futures exchange and
exchange clearinghouse. As such, the servers 10 are used for
setting and clearing trades, managing market participants' margins,
compliance and other functions.
[0033] Also, in communication with the exchange network 14 are one
or more exchange clearing members (cm) 16 and associated computer
systems. The clearing members 16 are in communication with the
exchange network 14 via communication links, including, for
example, electronic gateways and wired and wireless links using any
protocol. The clearing members 16 interact with market participants
18, receiving transaction data from and executing transactions on
behalf of the market participants 18. As is known, trades are
typically registered with and settled through clearing members 16.
As such, the clearing members 16 provide position information,
including transaction and position data for market participants 18
trading through the communication links to the exchange network 14
and, ultimately, the exchange server 10 and database 12.
[0034] The software programming that implements the functionality
and processes described herein resides primarily on the servers 10
and may be written in any suitable programming language, including,
for example, C++, Visual Basic, PERL, Cobalt, Java and the like.
Similarly, the database may employ any suitable hardware and
software, including, for example, SQL, DB2 and the like. In
general, the database includes tables for storing market
participant information, including account and market participant
identifiers (IDs), name, contact information, license number,
account number and other account identifying information, as well
as tables for tracking each transaction entered into by each market
participant and each participant's account's positions. Such tables
identify each transaction and position as associated with a
particular participant, as well as the associated details (e.g.,
contract, type of position (long or short), sized position (e.g.,
number of lots), and other contract details). As used herein the
term market participant is meant to include all possible
individuals and entities trading the contract, whether on the
exchange floor or through an approved electronic trading
marketplace.
[0035] Turning to FIG. 1b, a flow chart illustrating the overall
process of consolidating the futures contracts according to the
present embodiment will now be described. As initial steps, the
futures exchange issues the contracts (step 110), and the market
participants begin trading the contracts during the then current
month--the first-nearby month (step 120). The market participants
continue trading the contracts during the first-nearby month until
contract expiry.
[0036] As the market participants trade the contract, the futures
clearinghouse tracks each participant's transactions and portfolio,
updating the appropriate participant records in the database. The
Futures Clearinghouse also will enforce margin requirements and
withhold appropriate funds from each market participant, to fully
cover the changing price exposure of the open first-nearby
position. Margin requirements will remain until such time as
physical delivery has been completed, and all contractual
obligations have been satisfied.
[0037] Upon contract expiry, the futures exchange determines the
final settlement price for the first-nearby month (step 130) and
the spread index (step 140). As described below, these figures are
used when adjusting market participants' positions.
[0038] Following expiry of the contract, the market participants
consolidate their positions for the first-nearby month until the
consolidating deadline on matching day. Step 150. Such
consolidation may be achieved through any number of means,
including EFP, EFS, EFO, EFF and other transactions.
[0039] After the consolidation deadline on matching day, the
exchange clearinghouse proceeds to match open positions to assure
physical delivery. Step 160. In the present embodiment, physical
delivery is assured to those market participants having cargo-size,
or a multiple thereof, open long or short positions held at the
consolidation deadline. In so doing, the Futures Clearinghouse adds
to, or subtracts from, as appropriate, the First-Nearby Month
futures position of market participants with open positions that
are not cargo-size. Step 170. As described in greater detail with
regard to FIGS. 2a and 2b, adjustments are made to such market
participants' second-nearby month positions to offset the bringing
their positions in the first-nearby month to either zero or
cargo-size.
[0040] Having assured physical delivery by having matched open
positions and taken open positions to zero or to cargo-sized
positions, the futures clearinghouse updates the database records
accordingly and notifies the market participants of physical
delivery and any adjustments to their position. Step 180. Finally,
the participants so notified take or deliver, as the case may be,
physical delivery of the commodity pursuant to terms of the
contract. Step 190. The foregoing process is repeated each month
(or other period as determined by the exchange), with adjustments
made to the market participants' second-nearby month being taken
into account.
[0041] Having thus described the overall process, the matching
process will now be described in greater detail with reference to
FIGS. 2a and 2b. As noted above, this process is preferably
implemented via a specially programmed computer system. In certain
embodiments, the matching process is performed automatically,
beginning at a specified time, for example, a certain time after
the consolidation deadline. After confirmation that all
participants' first-nearby month position data has been received,
and the like.
[0042] As an initial step, the system orders or ranks the positions
remaining open at the consolidation deadline based on the size and
type (i.e., long or short) of the position. Step 210. It is to be
understood that this step is performed to make the searching of the
database for the open positions more efficient and, therefore, is
optional. Accordingly, in alternate embodiments, the program does
not order the records but rather scans the database as needed to
identify first-nearby month open positions in accordance with the
matching methodology. Furthermore, it is to be understood that the
ranking of the open positions may result in a single ranking, with
each position identified as either long or short, or as two
separate lists--one for each long and short positions.
Additionally, the list or lists may either be in separate storage
or memory or may be logical (e.g., kept as a linked list).
[0043] As noted above, a particular participant may have an open
position greater than cargo-size. To handle these positions, the
system of the present embodiment first divides the portion into
cargo-size portions, with any remainder. For example, a
participant's open position of 1400 lots will be divided into two
by 600, lot--the cargo-size--positions and a 200 lot position. Each
of the positions are treated separately when matching is
performed.
[0044] Next, the system searches the ranked positions and
identifies the largest long position and determines whether it is a
cargo-size position or multiple thereof. Step 212. In the event two
or more position are cargo-size, the system of the present
embodiment randomly selects one to use in providing physical
delivery, although other methodologies, which would preferably be
published by the exchange, are within the scope of the present
invention. Having identified a cargo-size long position, for which
the present embodiment guarantees physical delivery, the system
proceeds to match the position with the largest open short
position. Step 214. If the largest open short position is also
cargo-size, then no adjustment to the market participant's
first-nearby month position is necessary.
[0045] However, if the largest first-nearby month short position is
less than cargo-size, then the market participant's position is
brought to cargo-size by adding additional short position. Step
216. For that same market participant, the system then adjusts the
second-nearby month position to offset the added short position in
the first-nearby month. Step 218. The system then updates the
database and ranking to indicate which positions have already been
applied to the matching process. Step 220. In essence, the exchange
has adjusted the short position of one market participant to
provide physical delivery. Furthermore, because the system takes
the short position in order of largest size, the system first
applies cargo-size short positions.
[0046] By looping to step 212, the system takes the next largest
open long position to match against. As will be appreciated, by
taking the open positions in order of size, the system will match
all cargo-size long positions first, each time matching the long
position against the next largest short position. If, at step 212,
the system determines there are no more cargo-size long positions,
the system proceeds to match cargo-size short positions to less
than cargo-size long positions, thereby assuring those market
participants having cargo-size short positions can make physical
delivery.
[0047] Thus, the next step is determining whether the next largest
short position is indeed cargo-size. Step 222. If the next largest
short position is cargo-size, it is matched against the next
largest long position, which, because all cargo-size long positions
have already been addressed (steps 212-220), is less than
cargo-size.
[0048] Therefore, having identified a long position, the system
adds an additional long position to that of the market participant
associated with the next largest long position (as identified in
the database). Step 224. As with other determinations, the system
of the present embodiment randomly selects one of potentially
multiple same-size positions, although other methodologies are
within the scope of the present invention.
[0049] Once the position (and participant) has been identified, the
system brings the position to cargo-size by adding the necessary
long position to the participant's first-nearby month position.
Step 226. The market participant's second-nearby month positions
are then adjusted to offset the adjustment to its first-nearby
month position by adding a short position equal to the long
position added to the participant's first-nearby month position.
Step 228. The database and ranking are updated to reflect the
adjustments to the participant's positions and to identify the
position as having been applied to the matching process so it is
treated only once. Step 230.
[0050] As with the matching of cargo-sized long positions, the
matching of cargo-size short positions is repeated until all
cargo-size short positions are matched, each with a long position
of successively smaller size.
[0051] When the system determines there are no additional
cargo-size short positions in the first-nearby month (step 222),
the system proceeds to zero-out all remaining less than cargo-size
first-nearby month positions. Although this can be achieved in any
of a number of ways and in any order, the present embodiment first
examines the ranking and determines whether there are any unmatched
less than cargo-size long positions. Step 232. If so, the open long
position is taken to zero by adding to the first-nearby month
position of the market participant (as identified in the database
as having the subject position) a short equal in size to the open
long position. Step 234. In conjunction with adding the short
position, the participant's second-nearby month position is
adjusted by adding a long position equal in size to the short added
to the first-nearby month position, thereby offsetting the short
added in the first-nearby month. Step 236. The process loops
through the steps to bring the unmatched, less than cargo-size
positions to zero.
[0052] Next, the system brings any remaining unmatched, less than
cargo-size short positions to zero. This subprocess beings with the
system identifying any such positions by examining the ranking.
Step 238. If such a position exists, the system brings it to zero
by adding to the first-nearby month position of the participant
having the identified short position a long position equal in size
to the short position. Step 240. As with the unmatched longs, the
system must offset changes to the first-nearby month position with
changes to the participant's second-nearby month position.
Consequently, the system then adds to the participant's
second-nearby month position a short equal in size to the long
position added in the first-nearby month position. Step 242. In
essence, the zeroed out first-nearby month position is carried over
to the second-nearby month. Once the system has brought all
unmatched short positions to zero, the process is deemed
complete.
[0053] As noted above, adjustments made to a participants'
first-nearby month positions (whether bringing a position to zero
or to cargo-size) are offset by changes to the participant's
second-nearby month position. While various mechanisms for
effectuating such offsetting are within the scope of the present
invention, in the present embodiment, the price of the positions
that the Futures Clearinghouse adds to or subtracts from any
First-Nearby Month position will be at the Final Settlement Price.
Additionally, the Futures Clearinghouse will offset any positions
added to or subtracted from the First-Nearby futures position of
the market participant with an opposite Second-Nearby futures
position of equal volume or size, at a price equal to the
difference between the Final Settlement Price and the Spread Index.
As will be appreciated by those skilled in the art, calculating the
price in this manner, namely, using the Final Settlement Price and
Spread Index, has the benefit of enabling futures market
participants the opportunity to consolidate positions without
exposure to changing commodity prices (often referred to in the
trading vernacular as flat price risk) during the time period
required for position consolidation and matching.
[0054] In alternate embodiments, the price used when adjusting a
participant's first-nearby month position is not the final
settlement price as describe above, but rather is based on a basket
of commodities or grades of a commodities, or a formula, algorithm,
moving average, weighted average, simple average and the like of a
commodity, basket of commodities or grades of commodity.
[0055] Once the open positions have been matched or taken to zero
or to cargo-size, as the case may be, physical delivery is
effectuated according to the terms and conditions of a prevailing
physical market contract, as required by the terms and conditions
of the futures contract. Alternatively, the terms and conditions of
the futures contract itself may specify how physical delivery is to
be effectuated. In other words, the contract requires each matched
pair of participants to enter into a separate physical forward
contract, by which the short participant is obligated to deliver
and the long participant is obligated to take a cargo-size physical
delivery.
[0056] It should be understood that other matching methodologies
may be used while staying within the scope of the present
invention. For example, rather than ordering the positions and
matching full cargo lots for physical delivery based on the size of
the positions, the matching could be random or pseudo-random or
based on any other rule (e.g., positions meeting any one or more
criteria, such as those within a certain percentage of full cargo,
will be matched, with any further matching being random).
Furthermore, while the embodiment of FIGS. 2a and 2b first matches
cargo-size long positions, alternate embodiments may first match
cargo-size short positions. In other embodiments, although current
operating requirements/constraints at the loading ports do not
allow multiple parties to share or partition a single cargo,
matching of alternate embodiments includes aggregating positions of
multiple market participants for purposes of achieving a cargo-size
position. In such an embodiment, participants could express a
desire to have their positions aggregated when the system matches
positions, and the contract could guarantee physical delivery using
any of a number of operating procedures, including those described
herein and partial forward contracts. Additionally, participants'
position could be matched based, at least in part, on other factors
specified by the participants, such as desired port of
delivery.
[0057] Having described the process of the present embodiment in
generic terms, specific illustrative examples will now be
discussed. For purposes of the present example, after contract
expiry of the First-Nearby month, there is one market participant
with a cargo-size (in this example, 600 lots/600,000 barrel) long
futures position, and two market participants with short futures
positions of 400 and 200 lots, respectively. The 400 lot futures
short position will have 200 lots of First-Nearby month future
shorts added to their position, at the Final Settlement Price,
thereby bringing the position to cargo-size. Such first-nearby
month adjustment will be offset by adding 200 Second-Nearby month
futures longs to that participant's position. The price of the
Second-Nearby futures longs added will be the difference between
the Final Settlement Price and the Spread Index. A guaranteed
physical delivery will result, with the market participant with the
original 600 lot long futures position receiving a 600,000 barrel
physical delivery from the market participant with the original 400
lot short futures position.
[0058] Additionally, the market participant having the 200 lot
short futures will have its First-Nearby futures position reduced
to zero at the Final Settlement Price, and have an offsetting 200
lot short futures position added to their Second-Nearby futures
position, at the difference between the Final Settlement Price and
the Spread Index. No physical delivery results for this market
participant.
[0059] In embodiments where positions may be aggregated, the
positions of the two short market participants (i.e., those short
400 lots and 200 lots) are logically aggregated and matched against
the cargo-size long position of the long market participant.
[0060] Another, more detailed, illustrative example assumes a
First-Nearby Final Settlement Price of $30.00, a Spread Index=$0.50
(specified as a premium to First-Nearby Month Final Settlement
Price) and Second-Nearby Calculated Price=$29.50.
[0061] The example further assumes that, as determined on Matching
Day (after the consolidation deadline), the open first-nearby month
positions are as follows:
[0062] Matching Day Open Interest=1,200 lots
[0063] One futures long (participant A) with 1,200 lot position
[0064] Four short futures (participants B, C, D and E) with the
following positions: B=500 lots, C=400 lots, D=200 lots, and E=100
lots.
[0065] The Futures Clearinghouse matches B's 500 lot short and C's
400 lot short with the 1,200 lot long of A to create two physical
cargoes. The futures long enters into physical forward contract (in
the example for North Sea Light Crude Oil contract described below,
a BFO forward contracts pursuant to the terms and conditions of
term 12. Guaranteed Physical Delivery of the contract) with futures
short participants B and C.
[0066] Accordingly, the changes in market participant futures
positions (in lots) as a result of matching are as follows (where a
"-" indicates short position and a "+" indicates a long
position):
[0067] B=-100 First-Nearby at $30.00+100 Second-Nearby at
$29.50;
[0068] C=-200 First-Nearby at $30.00+200 Second-Nearby at
$29.50;
[0069] D=+200 First-Nearby at $30.00-200 Second-Nearby at $29.50;
and
[0070] E=+100 First-Nearby at $30.00-100 Second-Nearby at
$29.50.
[0071] Accordingly, the final net result to the physical positions
of the market participants are as follows:
[0072] Participant A receives one 600,000 barrel cargo from B;
and
[0073] Participant A receives one 600,000 barrel cargo from C.
[0074] As noted above, many commodities; including those that load
on large, ocean-going vessels, such as any of the global benchmark
crude oil grades, are within the scope of the present invention. In
one such embodiment that will now be discussed (referred herein as
the North Sea Light (NSL) Contract), operates similar to the
foregoing embodiment. In general, the Futures Clearinghouse
identifies all market participants with open First-Nearby futures
positions remaining after a specified day and time, and rank them
by position size. The Futures Clearinghouse will add to/subtract
from all open less than cargo-size First-Nearby Month futures
positions to the extent required to meet all cargo-size
obligations, which in the present embodiment is guaranteed physical
delivery.
[0075] If an imbalance remains between the number of qualified
cargo-size futures longs and shorts, the Futures Clearinghouse will
match the market participant with the largest offsetting less than
cargo-size open futures position in the First-Nearby month. If the
largest less than cargo size position is held by more than one
market participant, the Futures Exchange will randomly, or through
some other published methodology, determine which positions will be
increased to cargo-size for physical delivery.
[0076] When all cargo-size longs and shorts have been matched by
the Futures Clearinghouse for physical delivery, all remaining open
First-Nearby positions will be taken to zero. Again, the Futures
Clearinghouse will offset any lots added or subtracted in the
First-Nearby Month futures position of the market participant, with
an opposite Second-Nearby Month futures position of equal size.
[0077] All market participants will be informed by the Futures
Clearinghouse of changes to their positions and their delivery
obligations by a set time.
[0078] The grades acceptable for physical delivery for the
exemplary NSL contract, their loading terminals, and quality
differentials are Brent/Sullom Voe in the United Kingdom;
Forties/Hound Point in the United Kingdom at par; and Oseberg/Sture
in Norway at par.
[0079] Out of these grades, Brent is the marker BFO crude. Quality
differentials between Brent and the other acceptable grades may be
modified by the Futures Exchange from time to time to reflect
changing crude qualities and market conditions, with "par"
representing no premium or discount for the delivery of a
particular grade to the marker crude. For illustration purposes,
the commodity in the NSL embodiment will be the contract crude oil,
and for purposes of physical delivery, NSL will be linked to the
standardized Brent physical ("BFO") forward contract, although
other contracts may be used. Furthermore, in an alternative
embodiment where the underlying commodity is a petroleum product,
fuel oil, LNG, ethanol, fertilizer, or other commodity that loads
on large, ocean-going vessels, the physical delivery terms of the
futures contract would be modified to comply with the industry
standard forward physical contract.
[0080] In the present embodiment, NSL cargo-size futures short(s)
matched by the Futures Clearinghouse for physical delivery have the
right to declare the grade to be delivered. The NSL cargo-size
futures long(s) has the right to determine the quantity of crude
loaded within an amount, for example, one per-cent (1%) (or any
other percentage consistent with the prevailing physical contract),
of the standard 600,000 barrels cargo-size (594,000-606,000
barrels). Any imbalance between the actual volume loaded on the
tanker, as documented on the Bill of Lading, and 600,000 barrel
standard, may be cash settled at the NSL Final Settlement Price
within a set period, such as five (5) business days of Bill of
Lading date.
[0081] Each terminal imposes operational constraints that require
large, ocean-going vessels load a minimum volume of crude
(approximately 600,000 barrels). The NSL consolidation process
gives market participants until 12:00 PM noon EST on Matching Day,
to exchange their futures position for a physical position in the
forward cash partial cargo or full cargo market, swap market,
options market, and the like.
[0082] The Futures Clearinghouse will continue to require margin
payments from market participants with open First-Nearby futures
positions remaining beyond 12:00 PM EST time on Matching Day, to
cover the full value of the commodity, as determined by the Futures
Exchange. Margin fund requirements will be modified in accordance
with the terms of the Futures Exchange, when open positions are
moved from the First-Nearby Month to the Second-Nearby Month, or
released in instances of guaranteed physical delivery, when the
Futures Exchange receives confirmation from both matched market
participants that all obligations have been fulfilled under the
terms of the contract (for example, under Section 12. Physical
Delivery of the exemplary NSL Contract, below).
[0083] The Futures Exchange will generate the following NSL pricing
indexes, or other indexes beneficial to market participants to meet
daily pricing benchmark needs of commercials and non-commercials in
various time zones around the world. These indices will have no
effect on the determination of the final settlement price.
[0084] Daily average price of all First-Nearby trades executed-on
the Futures Exchange, referred to as NSL Lightwave 1 (or NSL Line 1
Lightwave);
[0085] Daily average price of all Second-Nearby trades executed on
the Futures Exchange, referred to as NSL Lightwave 2 (or NSL Line 2
Lightwave);
[0086] Average price each day of all First-Nearby trades executed
on the Futures Exchange during a set mid-day time range, such as
12:29 PM-12:30 PM EST, referred to as NSL Middex 1 (or NSL Line 1
One-Minute Mid-day Index); and
[0087] Average price each day of all First-Nearby trades executed
on the Futures Exchange during a set mid-day time range, such as
12:25 PM-12:30 PM EST, referred to as NSL Middex 5 (or NSL Line 1
Five-Minute Mid-day Index).
[0088] Although it is to be understood that the specific terms and
conditions of the contract will vary depending on numerous factors,
including for example, the specific commodity and exchange, the
following are exemplary terms and conditions of the NSL contract of
the present embodiment. The following twelve terms are merely
illustrative, as different terms and conditions may be utilized to
effectuate the various processes disclosed herein.
[0089] 1. Scope: The provisions of these rules shall apply to all
contracts bought or sold on the Futures Exchange for North Sea
Light (NSL) Crude Oil.
[0090] 2. Reference Crude Oils: For the purpose of this contract,
"North Sea Light Sweet Crude Oil" shall be defined as a mixture of
hydrocarbons that exist in a liquid phase in naturally occurring
underground reservoirs and remains in a liquid state at atmospheric
pressure after passing through surface separating facilities and
contains less than 0.50% sulfur by weight.
[0091] North Sea Light Sweet Crude Oil shall refer to crude oil of
current cargo export quality for vessel delivery at storage and
terminal installations as follows: (A) Brent at Sullom Voe in the
United Kingdom; (B) Forties at Hound Point in the United Kingdom;
and (C) Oseberg at Sture in Norway.
[0092] 3. Grade and Quality Specifications: North Sea Light Crude
Oil meeting the following specifications and designations shall be
deliverable in satisfaction of futures contract delivery
obligations under this rule: (A) Brent Crude Oil; (B) Forties Crude
Oil (Deliverable at Par); and (C) Oseberg Crude Oil (Deliverable at
Par).
[0093] Blends of these crude streams are only deliverable if such
blends constitute the terminal's common stream shipment, which
meets the grade and quality specifications for cargo export.
"Deliverable at Par" refers to no premium or discount for
delivering substitute grade for Brent marker.
[0094] 4. Definitions: For the purpose of the contract of this
embodiment, the following terms shall have the meanings set forth
below:
[0095] Barrel: 42 gallons of 231 cubic inches per gallon corrected
for temperature to 60 degrees Fahrenheit;
[0096] First-Nearby Month (Expiry Month): the most recent month for
which trading is being transacted;
[0097] Second-Nearby Month: the month immediately following the
First-Nearby Month;
[0098] NSL Final Settlement Price: the weighted average of the
final 30 minutes of trading in the spot First-Nearby month on
contract expiry day. Trading at Settlement (TAS), EFP, EFS, EFO and
EFF volumes shall be excluded from the weighted average price. The
Futures Exchange shall publish the Final Settlement Price within
approximately 30 minutes from the closing bell, on the last day of
trading. The Final Settlement Price shall be used for purposes of
physical delivery.
[0099] NSL Spread Index: the weighted-average of all bona fide
First-Nearby/Second-Nearby spread transactions (a purchase in one
of the two months executed simultaneously with a sale of equal
volume in the other month) executed on the exchange floor during
the final 30 minutes of trading on expiration day.
[0100] 5. Contract Value: The contract value shall be the
settlement price multiplied by 1,000.
[0101] 6. Contract Months: Trading shall be conducted in contracts
in such months as shall be determined by the Futures Exchange.
Trading in the contract month shall commence on the day fixed by
resolution of the Futures Exchange.
[0102] 7. Prices and Price Fluctuations: Prices shall be quoted in
U.S. dollars and cents per barrel. The minimum price fluctuation
shall be $0.01 (1 cent) per barrel. The Futures Exchange shall
determine any maximum price fluctuation or special price
fluctuation limits.
[0103] 8. Trading Hours: The Futures Exchange shall determine the
trading hours for the contract.
[0104] 9. Termination of Trading: The Futures Exchange shall set a
date each month when trading shall end, such as one business day
before the twenty-third calendar day prior to the first day of the
delivery month. If the twenty-third calendar day is a business
holiday in London or New York, or a weekend, trading shall end one
business day prior to the twenty-third calendar day.
[0105] 10. Exchange of Futures for, or in Connection with Physical
and the Exchange of Futures for, or in Connection with Swaps,
Options or Futures: Any exchange of futures for physical (EFP),
exchange of futures for swap (EFS), exchange of futures for option
(EFO), or exchange of futures for future (EFF) involving the North
Sea Light Sweet Crude Oil futures contract shall be governed rules
of the Futures Exchange.
[0106] 11. Position Matching: All open NSL Longs and Shorts are
given until a set time, such as noon (12:00 PM EST) on Matching Day
to bring positions to Cargo-Size (increments of 600 lots) or to
zero (0 lots) through Exchange for Physical, Exchange for Swap,
Exchange for Futures, or Exchange for Option transactions. The
Futures Exchange will determine the Matching Day each month, such
as one business day after the expiry of the First-Nearby contract
(All NSL expiry and matching dates will be published by the Futures
Exchange). Exchange Clearing Members with open NSL Long and Short
positions after contract expiry, shall inform the Futures
Clearinghouse of the aggregate open positions of each of its Market
Participants in the delivery month by a set time, such as 5:00 PM
EST on expiry day. The Futures Clearinghouse will match all open
Cargo-Size (600 lot) Longs and Shorts for Physical Delivery at a
set time, such as 3:00 PM EST on Matching Day.
[0107] 12. Guaranteed Physical Delivery: All physical deliveries
resulting from the Futures Clearinghouse matching process will be
governed by the General Terms and Conditions of the prevailing
physical market contract, such as "Shell Brent Partial Agreement",
and the "Shell UK Limited 1990 Agreement for the Sale of Brent
Blend Crude Oil on 15 Day Terms" with "Shell 2002 Amendments for 21
Day BFO (Brent, Forties, Oseberg)", although other physical
contracts may be used. Any agreement between the trading parties,
and approved by the Futures Clearinghouse will supercede these
terms and conditions with respect to Guaranteed Physical Delivery
matched cargoes.
[0108] NSL futures shorts have the ability to declare Brent,
Forties or Oseberg under the terms of the BFO forward contract.
[0109] NSL futures longs have the ability to determine the loading
volume, subject to the 1 percent operational tolerance under the
terms of the BFO forward contract. Any difference between the
actual delivery and standard cargo-size, currently 600,000 barrels,
will be cash settled at the NSL Final Settlement Price within a set
period, such as five (5) business days from the Bill of Lading
date.
[0110] As will be appreciated, the foregoing NSL contract assures
market participants with cargo-size futures positions at contract
expiry, a physical forward contract with a financially secure
counter-party, resulting in a reliable, transparent method for
commercials to lock in price protection, refinery supply, or
production outlets, while enabling speculators, financial
institutions, and hedgers the ability to participate in the
contract with relatively small positions, such as positions of
1,000 barrels. Furthermore, because the contract is backed by the
futures clearinghouse, the present contract also has the benefit of
satisfying audit and banking requirements and scrutiny.
[0111] While the invention has been described in conjunction with
certain embodiments thereof, various modifications and
substitutions can be made thereto without departing from the spirit
and scope of the present invention. The invention has only also
been described with reference to examples, which are presented for
illustration only, and thus no limitation should be imposed. By way
of non-limiting example, the particular settlement price and spread
index used may be adjusted to essentially any amount deemed
equitable; the time at which matching and other steps occur, as
well as the order of such steps, may similarly be changed; the
contracts may apply to different commodities and can be modified to
the extent export terminals change restrictions to permit more than
one market participant to load on a single vessel. Furthermore,
although certain functions and procedures have been described as
being performed by a particular entity, such as the exchange
clearinghouse, such functions and procedures may be performed by
other entities. Accordingly, the scope of the present invention is
to be governed by the claims appended hereto.
* * * * *